Aggregate Planning

Aggregate Planning
Aggregate Planning
in a Supply Chain
 What is Aggregate planning?
 Management options
 Costs involved
 Aggregate strategies
 Level Strategy
 Chase Strategy
 Aggregate planning using Linear Programming

 Examples
The Planning Process
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion
Top
executives Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing operating plans
Short-range plans
(up to 3 months)
Job assignments
Operations Materials Requirement Planning
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help
Responsibility Planning tasks and horizon

3
What is Aggregate Planning?
Aggregate Planning is a overall

production planning process by which
a company determines ideal levels of
capacity to meet the demand over a
specified time horizon. ( roughly
between 3 and 18 months).
Example: Steel manufacturing.
Current Capacities
AGGREGATE
Forecast of demand Costs
PRODUCTION
Commitments
PLAN
Raw
Inventory material
Backorder/ Lost requiremen
sales t
Machine capacity increase/

decrease
Workforce level
5
Goal: Maximize profits/Minimize costs,
meet demand.
The Aggregate Planning Problem:
“Given the demand forecast for each period in the

planning horizon, determine the production
level, inventory level, and the capacity level for
each period that maximizes the firm’s profit
over the planning horizon”
6
Management options to
meet fluctuating demand
 Build inventories in slack periods in
anticipation of higher demand later in
the planning horizon
 Carry backorders or tolerate lost sales
during peak periods
 Use overtime in peak periods and
under time (idle time)in slack periods,
while holding workforce and facilities
constant.
7
 Vary capacity by changing the size of the
workforce through hiring and firing.
 Vary capacity through changes in plant and
equipment ( long term option)
Each option involve cost ( tangible and intangible).

Aim of Aggregate production planning is to choose
the best option.
8
Capacity Options
 Changing inventory levels
 Increase inventory in low demand
periods to meet high demand in
the future
 Increases costs associated with
storage, insurance, handling,
obsolescence, and capital
investment 15% to 40%
 Shortages can mean lost sales and
poor customer service
9
Capacity Options
 Varying workforce size by hiring
or layoffs
 Match production rate to demand
 Training and severance costs for
hiring and laying off workers
 New workers may have lower
productivity
 Laying off workers may lower
morale and productivity
10
Capacity Options
 Varying production rate through
overtime or idle time
 Allows constant workforce
 May be difficult to meet large
increases in demand
 Overtime can be costly and may
drive down productivity
 Absorbing idle time may be
difficult
11
Capacity Options
 Subcontracting
 Temporary measure during
periods of peak demand
 May be costly
 Assuring quality and timely
delivery may be difficult
12
Capacity Options
 Using part-time workers
 Useful for filling unskilled or low
skilled positions, especially in
services
13
Demand Options
 Influencing demand
 Use advertising or promotion to
increase demand in low periods
 Attempt to shift
demand to slow
periods
 May not be
sufficient to
balance demand
and capacity
14
Demand Options
 Back ordering during high-
demand periods
 Requires customers to wait for an
order without loss of goodwill or
the order
 Most effective when there are few
if any substitutes for the product
or service
 Often results in lost sales
15
Aggregate Planning
Options
Option Advantages Disadvantages Some Comments
Changing Changes in Inventory holding Applies mainly to

inventory human cost may production, not
levels resources are increase. service,
gradual or none; Shortages may operations.
no abrupt result in lost
production sales.
changes.
Varying Avoids the costs Hiring, layoff, and Used where size
workforce of other training costs of labor pool is
size by alternatives. may be large.
hiring or significant.
layoffs
16
Aggregate Planning
Options
Varying Matches Overtime Allows flexibility

production seasonal premiums; tired within the
rates fluctuations workers; may aggregate plan.
through without hiring/ not meet
overtime or training costs. demand.
idle time
Sub- Permits flexibility Loss of quality Applies mainly in

contracting and smoothing control; reduced production
of the firm’s profits; loss of settings.
output. future business.
17
Aggregate Planning
Options
Using part- Is less costly and High turnover/ Good for unskilled
time more flexible training costs; jobs in areas
workers than full-time quality suffers; with large
workers. scheduling temporary labor
difficult. pools.
Influencing Tries to use Uncertainty in Creates

demand excess capacity. demand. Hard to marketing ideas.
Discounts draw match demand Overbooking
new customers. to supply used in some
exactly. businesses.
18
Aggregate Planning
Options
Back May avoid Customer must Many companies

ordering overtime. Keeps be willing to back order.
during high- capacity wait, but
demand constant. goodwill is lost.
periods
19
Costs involved
1. Procurement Cost
2. Production Cost
3. Inventory holding cost
4. Back orders/ Lost sales
5. Cost of Increasing/Decreasing work force
6. Cost of overtime/ under time
7. Costs to vary production rates.
Inputs for an aggregate plan
 Specify the planning horizon (typically 3-18
months)
 Aggregate planner requires the following
information
 Demand forecast in each period
 Production costs
 labor costs, regular time ($/hr) and overtime ($/hr)
 subcontracting costs ($/hr or $/unit)
 cost of changing capacity: hiring or layoff ($/worker) and
cost of adding or reducing machine capacity ($/machine)
 Labor/machine hours required per unit
 Inventory holding cost ($/unit/period)
 Stockout or backlog cost ($/unit/period)
 Constraints: limits on overtime, layoffs, capital available,
stockouts and backlogs
Outputs of Aggregate Plan
 Production quantity from regular time,

overtime, and subcontracted time: used to
determine number of workers and supplier purchase levels
 Inventory held: used to determine how much
warehouse space and working capital is needed
 Backorder/stock out quantity: determines the
customer service levels.
 Machine capacity increase/decrease: used to
determine if new production equipment needs to be
purchased
Aggregate Planning
Strategies
 Chase strategy – using capacity
as the lever
 Level strategy – using inventory
as the lever
 Mixed strategy – a combination
of the two strategies
Chase Strategy (using capacity as
lever)
Production rate is synchronized with demand by varying
machine capacity or hiring and laying off workers as the
demand rate varies.
Drawbacks:
 In practice, it is often difficult to vary capacity and workforce on
short notice
 Expensive if cost of varying capacity is high
 Negative effect on workforce morale
When to use:
Inventory holding costs are high and costs of changing capacity
are low.
Favored by many service organization.
Level Strategy
(using inventory as lever)
Maintain stable machine capacity and workforce
levels with a constant output rate
Shortages and surpluses result in fluctuations in
inventory levels over time
Drawback:
 Large inventories and backlogs may accumulate.
When to use:
 Should be used when inventory holding and
backlog costs are relatively low
Roofing Supplier Example
( Using level strategy)
Month Expected Demand Production Days Demand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Average Total expected demand

requirement =
Number of production days
6,200
= = 50 units per day
124
26
1
Forecast demand
Production rate per working day
70 – Level production using average

monthly forecast demand
60 –
50 –
40 –
30 –
0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
Figure 13.3 working days
27
2
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
Overtime pay rate $ 7 per hour

(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
28
2
Month Production at Demand Monthly Ending
Cost Information
50 Units per Forecast Inventory Inventory
Inventory carry cost
Day $ 5Change
per unit per month
Jan pay rate
Average 1,100 900 +200
$5 per hour ($40200
per day)
Feb 900 700 +200 400
Mar 1,050 800 (+250
above 8 hours 650
per day)
Apr 1,050 1,200 -150 500
Labor-hours
May to1,100
produce a unit 1,500 1.6-400
hours per unit
100
Cost of increasing
June daily production
1,000 1,100rate $300 per unit
-100 0
Total units of inventory carried over from one 1,850
k f orce
Cost of decreasing daily production rate $600 per a unitw or
month to the
c o n s
nextt nt= 1,850 units
Table 13.3
(layoffs) –
Plan 1
Workforce required to produce 50 units per day = 10 workers
29
2
Month Production at Demand Monthly Ending
Cost Information
Costs 50 Units per Day ForecastCalculations
Inventory Inventory
Inventory
Inventory carry cost
carrying $9,250 (=$1,850
5 Change
per unit
unitsper carried
month
Subcontracting
Jan cost per unit
1,100 900 x $10
$5+200
per unit) 200
per unit
Regular-time
Feb pay ratelabor
Average 900 49,600
700 (=$10 workers
5+200
per x 400
hour ($40 $40
per day)
per day x 124 days)
Mar 1,050 800 +250 650
Overtime pay rate
Other costs 0 $ 7 per hour
Apr
(overtime, 1,050
hiring, 1,200 -150 8 hours 500
(above per day)
layoffs,
May 1,100 1,500 -400 100
Labor-hours to produce a unit
subcontracting) 1.6 hours per unit
June 1,000 1,100 -100 0
Cost
Totalof cost
increasing daily production
$58,850 rate $300 per unit
(hiring and training) 1,850
CostTotal units of inventory
of decreasing carriedrate
daily production over$600
fromper
oneunit
Table 13.3
(layoffs) month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
30
2 7,000 –
6,000 –
Reduction
of inventory
Cumulative demand units
5,000 –
Cumulative level 6,200 units
4,000 – production using
average monthly
3,000 – forecast
requirements
2,000 –
1,000 – Cumulative forecast

requirements
–
Excess inventory
Jan Feb Mar Apr May June

Figure 13.4
31
3
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Table 13.2
n t r a cting
2 – subco
Plan
Minimum requirement = 38 units per day
32
3
Forecast demand
70 –
Level production
60 – using lowest
monthly forecast
demand
50 –
40 –
30 –
0 –
     
22 18 21 21 22 20 = Number of
working days
33
3
Cost Information


Table 13.3
(layoffs)
34
3
Cost Information
Inventory carry cost $ 5 per unit per month
In-house
Subcontracting production
cost per unit = 38
$10units per day
per unit
Average pay rate x$124
5 perdays
hour ($40 per day)
= 4,712 units
Subcontract units = 6,200 - 4,712
Labor-hours to produce a unit = 1,488 units
1.6 hours per unit
Table 13.3
(layoffs)
35
3
Cost Information
Inventory carry cost $ 5 per unit per month
In-house
Subcontracting production
cost per unit = 38
$10units per day
per unit
Average pay rate x$124
5 perdays
hour ($40 per day)
= 4,712 units
Costs (above 8 hours per day)
Calculations
Subcontract units = 6,200 - 4,712
Regular-time labor $37,696= (= 7.6 workers
1,488 units x $40 per
day x 124 days)
Subcontracting
(hiring and training) 14,880 (= 1,488 units x $10 per
unit)
Table 13.3
(layoffs)
Total cost $52,576
36
4
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Table 13.2
a nd firing
ng
Plan 3 – hiri
Production = Expected Demand
37
4
Forecast demand and

monthly production
70 –
60 –
50 –
40 –
30 –
0 –
     
22 18 21 21 22 20 = Number of
working days
38
4
Cost Information


Table 13.3
(layoffs)
39
4
Month Forecast Daily Basic Extra Cost of Extra Cost of Total Cost
Cost Information
(units) Prod Production Increasing Decreasing
Rate Cost (demand Production Production
Inventory carrying costx 1.6 hrs/unit $ 5 per unit per month
(hiring cost) (layoff cost)
Subcontracting cost per xunit$5/hr) $10 per unit
Jan 900 41 $ 7,200 — — $ 7,200
Feb 700 39 5,600 — $1,200 6,800
Overtime pay rate $7 per(=hour
2 x $600)
Mar 800 38 6,400 — (above $600
8 hours per day)
7,000
(= 1 x $600)
Apr 1,200 57
Labor-hours to produce a9,600
unit $5,700
1.6
(= 19 x $300)
hours —
per unit 15,300
Cost
May of 1,500
increasing68daily 12,000
production rate
$3,300$300 per unit
— 15,300
(hiring and training) (= 11 x $300)
June of 1,100
Cost 55daily production
decreasing 8,800 — $600 per$7,800
rate unit 16,600
Table 13.3 (= 13 x $600)
(layoffs)
$49,600 $9,000 $9,600 $68,200
Table 13.4
40
Comparison of Three
Plans
Cost Plan 1 Plan 2 Plan 3
Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 37,696 49,600

Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200
Plan 2 is the lowest cost option Table 13.5

41
Aggregate planning using Linear
Programming
Case Study: Red Tomato Gardening

Tools Inc.
42
 The demand is highly seasonal for gardening tools.
 Red Tomato’s options for handling seasonality are
 Adding workers during peak season
 Subcontracting
 Building up inventory during slow months
 Building up backorders ( orders delivered late to customers)
 Starting Point: Build a Demand Forecast.
43
Aggregate Planning using Linear Programming
Case Study: Red Tomato Tools.
Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
Time horizon: 6 months

Selling price:$40
Beginning inventory: 1,000 units
Ending inventory: at least 500 units
Workforce as on Jan 1st : 80 employees
20 working days each month- 8 hour day at $4 per hour regular time
No employee is allowed to work more than 10 hours of overtime per month
.
Case Study: Red Tomato Inc.
Cost Parameters
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit
Following costs are evaluated.
 Regular time Labor cost
 Overtime Labor cost
 Cost of Hiring
 Cost of Layoff
 Cost of Inventory
 Cost of Stock out
 Cost of Materials
 Cost of Subcontracting
46
Case Study: Red Tomato Inc.
Decision Variables
Wt = Workforce size for month t, t = 1, ..., 6
Ht = Number of employees hired at the beginning of month t,
t = 1, ..., 6
Lt = Number of employees laid off at the beginning of month t,
t = 1, ..., 6
Pt = Number of units produced in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units stocked out/ backlogged at the end of month t, t = 1, ..., 6
Ct = Number of units subcontracted for month t, t = 1, ..., 6
Ot = Number of overtime hours worked in month t, t = 1, ..., 6
Objective Function
6 6
Min ∑640 W t +∑300 H t
t=1 t=1
6 6 6
+∑500 Lt +∑6 O t +∑2It
t=1 t=1 t=1
6 6 6
+∑5 S t +∑10 P t +∑30 C t
t=1 t=1 t=1
Constraints:
1. Workforce, hiring and layoff constraint
W t =W t −1 + H t − Lt, or
W t −W t −1 − H t + Lt = 0
for t =1,..., 6, where W 0 = 80 .
Constraints ( Contd..)
2. Capacity Constraint:
Production for each month
cannot exceed capacity
P t ≤40 W t +Ot 4 ,
40 W t +Ot 4 −P t ≥0,
for t =1,..., 6.
3. Inventory balance constraint:
(Balances inventory at the end of each
period)
I t −1 + Pt + C t = Dt + S t −1 + I t − S t ,
I t −1 + Pt + C t − Dt − S t −1 − I t + S t = 0,
for t = 1,..., 6,where I 0 = 1,000 ,
S 0 = 0,and I 6 ≥ 500 .
4. Over time limit constraint
Ot ≤ 10 W t,
10 W t − Ot ≥ 0,
for t = 1,..., 6.
Plus, add constraints such that
•Each variable must be non-negative
• Make number of employees, number of production units an Integer value
•There is no backlogs at the end of period ie, S6 =0
The LPP can be solved using Excel tool solver, LINGO, LINDO etc.
Summary
 Aggregate planning is an intermediate time frame
planning process by which a company determines
optimum levels of capacity, production and inventory
over a specified time horizon.
 Aggregate planning problem aims to maximize firm’s
profit/ minimize costs over the planning horizon.
 There are 3 main kinds of aggregate planning
strategies: Chase, Level and Mixed.
 Aggregate planning problem can be solved as an LPP,
depending on the nature of parameters involved.
Thank you !

Aggregate Planning

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Aggregate Planning

Uploaded by

Copyright:

Available Formats

Aggregate Planning

 Aggregate planning using Linear Programming

Responsibility Planning tasks and horizon

Aggregate Planning is a overall

Machine capacity increase/

The Aggregate Planning Problem:

“Given the demand forecast for each period in the

Each option involve cost ( tangible and intangible).

Changing Changes in Inventory holding Applies mainly to

Varying Matches Overtime Allows flexibility

Sub- Permits flexibility Loss of quality Applies mainly in

Influencing Tries to use Uncertainty in Creates

Back May avoid Customer must Many companies

 Production quantity from regular time,

 Negative effect on workforce morale

Average Total expected demand

70 – Level production using average

Overtime pay rate $ 7 per hour

Labor-hours to produce a unit 1.6 hours per unit

1,000 – Cumulative forecast

Jan Feb Mar Apr May June

Minimum requirement = 38 units per day

Overtime pay rate $ 7 per hour

Labor-hours to produce a unit 1.6 hours per unit

Production = Expected Demand

Forecast demand and

Overtime pay rate $ 7 per hour

Labor-hours to produce a unit 1.6 hours per unit

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 49,600 37,696 49,600

Plan 2 is the lowest cost option Table 13.5

Case Study: Red Tomato Gardening

Time horizon: 6 months

You might also like